It’s that time of year again. A new financial year looms upon us, and the budget promises to giveth with one hand; and taketh with another. If you smoke, drink, and drive (although hopefully not at the same time!), then unsurprisingly you’re losing out again, despite increases in the personal tax allowance and some other smoke-screen niceties. (Calculate yours with the BBC’s 2012 Budget Calculator).

It was heralded the average family will be around £300 better off this year than last – and with the drop in inflation that’s a serious possibility – but that figure will no doubt be lost in rent, travel, fuel, energy and countless other subtle yet hefty increases. The smokers and drinkers among us will be pushed further into the ‘another year; another reduction in spending power’ scenario!

But it need not be all doom and gloom. Ask yourself this, and be honest:

Are you saving enough, and are your savings working hard enough?

How Much is ‘Enough’?

There has been a lot of discussion recently and historically about how much is ‘enough’ when it comes to saving. Some folks advocate 10% of your income. Some advocate 1/3, and still more somewhere from the former figure up to 60% or even beyond. Yet others simply and succinctly say “save as much as you can“. Now let’s be grounded about this. If you’re earning minimum wage  saving 1/3 of your income just isn’t going to happen if you live practically anywhere in this country and in particular the South East where I hail from. London, Surrey, Kent and Sussex all have some of the highest living costs of the whole of the United Kingdom. Saving as much as you can likewise isn’t going to happen if you feel squeezed to the point of popping already.

‘Enough’ may also encompass whether you have savings already, or are starting from scratch. Some may even question why they need to save at all when it is hard enough living paycheck to paycheck, nevermind having to contemplate rainy days as well. But how much more secure would you feel knowing you had 3 months’ living expenses saved up, should you suddenly find yourself unemployed? In today’s economic climate that possibility is statistically far more likely now than it was 5 years ago.

6 million households only have enough savings to cover their living expenses for 5 days. That truly is living ‘paycheck to paycheck’ without any security whatsoever. What happens when you can’t make your mortgage payment or your rent? Council tax? Gas? Electric? Telecoms? Car finance?

Affording Your Savings

One of the regular arguments against saving more, or starting to save at all, is “I can’t afford to live, nevermind save!”. Now I don’t propose that one size fits all when it comes to this, but saving is a mindset and thinking positively about it will make it happen. If you earn £1,000 a month, and your fixed living costs are £830/mo (rent, council tax, gas, electricity, water, travel, etc.) then in theory your discretionary availability is £170/mo. These figures will need to be adjusted for couples – I’m using the singular for ease, here.

You may find that £170 is ordinarily eaten up by food shopping, eating/drinking out, your mobile phone bill, entertainment and other luxuries that cause your available balance to perform a rapid disappearing act as the month goes on. But what if you throw £50 into a savings account the moment you get paid, and eat out less once or twice a month? Try the DownShift Challenge and the other 7 tips to reduce your monthly food shopping bill, and save another £30 a month. If your mobile contract is due for renewal, try haggling with your provider and shopping around for a better deal maybe saving £5 a month; and you can do the same with digital TV, too. Don’t forget the Nectar points if you shop in Sainsburys as points make for free shopping as well.

For that little bit of pain by the end of the financial year (assuming you’re good and haven’t touched it), you’ll have £1,020 saved up! That’s over 1 months salary, and well over 1 month’s living expenses. As you get into the saving and frugality habit, you will find ways of squeezing more out of less, enabling you to concentrate more of your income into savings.

Not bad, considering it didn’t appear we could afford to save, is it?

When your contract comes up for renewal on your rented accommodation and you feel like a change anyway, see if you can find somewhere that’s still suitable and pleasant, but a little cheaper. Even shaving and saving £25 a month off you rent equates to another £300 a year you could potentially be saving instead.

It may be a cliché but the old saying “look after the pennies, and the pounds will take care of themselves” is still valid. It’s not the big, fixed expenses that necessarily drain your bank account and sabotage your savings; it’s the small things like your daily double-shot latte, a Friday night out with friends every Friday, and that £60 a month phone contract when you could haggle it down to £35 for the same deal.

Make Your Money Make Money

Once you have got into a routine of saving, and enjoy seeing the balance rise month on month, wouldn’t it be lovely if you actually got paid to save? Back to basics: That’s the point of “interest” (and for once, I don’t mean that sting in the tail of your credit card!). Oh no. I mean the nice one where your bank actually pays you to save your money instead of spend it.

The trick is to find who is paying a decent amount. If you’re not careful and just leave your money in the bank that runs your current account (a few exceptions notwithstanding), you’re probably earning a big fat 0% interest. Even most High Street banks’ Savings accounts pay a paltry sub-1% on balances most normal working folks can hope to accumulate.

So shop around. Search Google for comparison websites and see what savings accounts offer decent interest. As a ballpark figure you’re looking these days at around 2-2.5% for a no-frills no-strings-attached savings account, but see what is out there. As an added incentive to leave your savings alone if you’re happy a few months down the line that you are not going to raid your piggy bank, compare ISA‘s, too.

Chase The Rate

I’m often asked questions along the line of “is it really worth chasing interest rates? It’s a real hassle to move my savings”. Just taking our earlier example where we’ve saved up £1,020 in a year, watch this example:

• Our Deposit (per month): £85
• Interest Rate: 2.5%
• End Balance (first year): 1,031.77

That’s £11.77 we’ve got for ‘free’ just for not leaving the money in a non-interest account. But then, things really start to get interesting if we leave it for a while longer, and keep adding money to it…

• Existing Balance: £1,031.77
• Our Deposit (per month): £85
• Interest Rate: 2.5%
• Year End Balance (2nd year): £2,089.63

That’s very nearly £50 we’ve got for free. Imagine what that figure will do if you keep doing this, year in, year out? Curious? Here’s a 10 year end figure just using the same workings out: £11,574.61 – That’s £1,374.61 the bank has given you! Want to know more about how? Read about the power of compound interest and rate chasing.

Start Small. But Do Start!

If you are already saving and saving a decent amount that you’re honestly happy with, then give yourself a pat on the back. If you’re keen to start, then check out the ‘Frugal Friday’ series of posts on here and look at all sorts of way to reduce your everyday spending and find cash you’d thought “lost to living”.

There’s nothing wrong with starting small. Even saving £5 a month by the end of the year will give you £60 in the bank that will help towards Christmas presents instead of having to rely on your credit card. But the important thing is to actually start saving. Once you get into it, it really is quite rewarding in more than a financial sense.

Good luck!